Two Recent Studies of Economic Impacts of Climate Change

Two recent studies outline the potentially devastating economic impacts of unchecked climate change. In a recent study released by Citigroup, the economic effects of action on climate change versus inaction on climate change were compared, with the conclusion that inaction brought much greater potential economic impacts. This week the Journal Nature issued a report concluding inaction on climate change could result in a 23% reduction in global income by 2100.

The report in Nature determined that the results of recent studies demonstrate”

” …the first evidence that economic activity in all regions is coupled to the global climate and establish a new empirical foundation for modelling economic loss in response to climate change, with important implications. If future adaptation mimics past adaptation, unmitigated warming is expected to reshape the global economy by reducing average global incomes roughly 23% by 2100 and widening global income inequality, relative to scenarios without climate change.”

Perhaps more interesting is the approach stated in the Citigroup study:

“We are not climate scientists, nor are we trying to take sides in the global warming debate, rather we are trying to take an objective look at the economics of the discussion, to assess the incremental costs and impacts of mitigating the effects of emissions, to see if there is a ‘solution’ which offers global opportunities without penalizing global growth, whether we can afford it (or indeed we can afford not to), and how we could make it happen.”

Citigroup notes there are two paths that may be followed in dealing with energy demand:

1. Inaction–We allow macroeconomics to drive demand for energy by ignoring the implications for emissions and feeding energy demand based purely on (often short term) economics and the immediate availability of fuel. To meet rapidly growing energy demand, this scenario will result in an enormous ‘energy bill’ for the world, and alongside this we must also consider the potential financial implications of climate change.

2. Action–We mold our energy future driven by a blend of emissions, economics, avoided costs and the implications of climate change. This requires an assessment of how much ‘extra’ we will spend on transforming the global energy mix to a low carbon energy complex, and what the other associated costs will be in terms of lost global GDP, stranded assets etc., offset against the avoided costs of climate change.”

The Study concludes that there will be economic pain for some if the Action scenario is followed. This will be particularly difficult for those invested in fossil fuels. Yet, the bottom line economic conclusion appears to be:

“…going down the route of ‘Inaction’ would lead to a reduction in global GDP which could reach $72 trillion by 2060 depending on temperature increase, scenario and discount rate used. We calculate the implied return of incremental avoided costs on annual spend and even though the returns are not spectacular, in today’s context of low yields, and certainly in the context of potential implications of climate change inaction on society and global GDP, and with the additional benefit of cleaner air, the ‘why would you not’ argument comes to the fore, an argument that becomes progressively harder to ignore over time.”

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